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HomeMy WebLinkAbout03 - - Item 1 - 11/12/20191 CITY COUNCIL STUDY SESSION AGENDA REPORT MEETING DATE: NOVEMBER 12, 2019 ITEM NUMBER: 1 SUBJECT:REVIEW THE GENERAL FUND’S FISCAL YEAR 2018-19 PRELIMINARY FINANCIAL RESULTS; FISCAL YEAR 2019-20 PACING THROUGH SEPTEMBER 30, 2019; AND STATUS OF DEFERRED ITEMS FROM FISCAL YEAR 2019-20 BUDGET ADOPTION DATE: NOVEMBER 7, 2019 FROM: FINANCE DEPARTMENT PRESENTATION BY: KELLY TELFORD, CPA, FINANCE DIRECTOR FOR FURTHER INFORMATION CONTACT: KELLY TELFORD, CPA, FINANCE DIRECTOR, (714) 754-5243 PURPOSE: This report is intended to update the City Council on the following items:  Fiscal Year (FY) 2018-19 General Fund preliminary financial results and the projected ending fund balance;  FY 2019-20 General Fund pacing for the quarter ended September 30, 2019; and  Status of the FY 2019-20 deferred items for the Finance Department, Information Technology Department, Development Services Department and Police Department. BACKGROUND: Following the close of each fiscal year, the City retains an independent public accounting firm of licensed certified public accountants to complete an audit of the City’s financial records. The City’s FY 2018-19 annual audit started in late September and is still on- going. Staff expects to finalize the financial reports by mid-December. For this reason, the FY 2018-19 General Fund financial results presented in this report are considered preliminary and subject to change. Additionally, one of the City Council’s goals is to keep the City fiscally sustainable and to address our long-term obligations as well as immediate needs. As a part of the effort toward this goal, the Finance Department has implemented a new procedure of reporting the budget to actual pacing to the City Council on a quarterly basis. In this report, staff also presents the General Fund pacing through the quarter ended September 30, 2019. 2 Lastly, during the FY 2019-20 budget adoption, several positions were not approved and the Finance Department was asked to bring these requests, along with the Police Department’s request, back for consideration once we had preliminary results for FY 2018-19 and had closed the first quarter of FY 2019-20. In this report, staff is providing recommendations for addressing these requested items. DISCUSSION: FY 2018-19 GENERAL FUND FINANCIAL RESULTS (PRELIMINARY) (Attachment 1) The General Fund revenues totaled $143.8 million and are approximately $2 million higher than the budget. Significant revenue budget variances include the following items:  Sales and use tax had an unanticipated increase of $2.9 million. Several factors contributed to this one-time increase: (1) The City received approximately $780,000 more from the County sales and use tax pool primarily as a result of the Wayfair decision, which became effective April 1, 2019. It requires companies with more than $500,000 in online taxable sales to remit sales tax based on delivery location rather than point-of-sale location. The online sales tax is remitted to the County pool and subsequently distributed to local agencies based a formula. Staff and the City’s sales tax consultant, HdL & Companies are uncertain at this time whether the increased sales tax trend will continue as there is not sufficient data to analyze the Wayfair impact at this time. Staff and HdL are monitoring this revenue trend closely and will report back to the City Council again at the mid-year budget review. (2) The City experienced a surge in sales tax from luxury consumer goods sales and luxury automobile sales. This increase is not consistent throughout the fiscal year and tends to be cyclical in nature.  Transient Occupancy Tax (TOT) was lower than budget by $975,000. Over the past several years, as newer hotels were developed and existing hotels renovated in the surrounding cities, Costa Mesa’s hotels have experienced greater competition. Additionally, the international leisure travel trends have shifted due to federal travel limitations imposed on certain countries and this has directly impacted the local hotels’ occupancy rate. Staff have been analyzing relevant data for this revenue source and will address this concern in the FY 2019-20 pacing section of this report.  Measure X Marijuana Gross Receipts Tax was under budget by $1.4 million. The causes are: (1) There were significant delays at the State level issuing marijuana business permits during a portion of the year. This created challenges for operators which caused delays in opening for business. As of June 30, 2019, only five local businesses were in operation; much less than what was projected during development of the FY 2018-19 budget. 3 (2) The City’s current gross receipt tax rate is six percent, which is more than some neighboring cities. The higher rate might have posted unintended hindrance to certain segments of the local legal marijuana industry. (3) The City continues to see illegal marijuana businesses operating throughout the City and has increased its efforts to shut them down; however, these illegal businesses cause challenges for the legal businesses and disincentivize consumers from purchasing marijuana products from legal sellers. While Costa Mesa does not allow dispensaries to operate within the City, it impacts the other segments of the industry. The decreased marijuana gross receipts tax was offset by an increase of $450,000 in the marijuana business permit and related conditional use permit (CUP) fees.  Fees and Charges for Services was over budget by $700,000. The increase is primarily from plan check fees generated by the fee increases approved as part of the FY 2018-19 adopted budget. Staff also experienced an increase in plan check fees in the last five months of the fiscal year, which has since leveled off in FY 2019-20. The other notable revenue item is from the Fire Department’s new ambulance transportation program, which started in September 2018. The program generated $3.05 million in gross revenue, beating budget by $50,000 in its first year of operation. The General Fund operating expenditures (before transfers-out) totaled $127.6 million, which is $443,000 under budget. This unexpected savings exceeded the Finance Department’s original projection from May 2019. At that time, staff projected the General Fund expenditures would outpace budget. During the last two months of FY 2018-19, non-public safety departments were asked to help address this. Finance performed an in-depth review of their expenditure line items and the departments made thoughtful reductions, resulting in a year-end savings over budget. The General Fund transfers-out totaled $20 million. Approximately 51 percent of transfers-out were for one-time costs, such as $1.7 million to the IT Replacement Fund for new land management and financial systems; $1.75 million set-aside for a Section 115 pension trust; $3.3 million to the Self-Insurance Fund for litigation costs and $3.4 million to purchase the permanent bridge shelter site. The recurring transfers included $8.6 million for capital improvement projects, $271,000 for non-capital related expenses, and $1 million to operate the City’s temporary homeless shelter. In FY 2018-19, the City opened its first homeless shelter. The General Fund transferred a total of $4.4 million to acquire a permanent shelter site and begin operations in April 2019. The acquisition costs resulted in the purchase of an asset that is expected to appreciate over time. It is important to note that these shelter costs were not anticipated at the time the FY 2018-19 budget was adopted. Overall, the General Fund ended the year with an operating deficit of $3.8 million. It is important to note that if the City had not transferred $4.4 million for shelter related expenses, the General Fund would have ended the fiscal year with an operating surplus of $567,000. 4 When comparing the amended budget to actuals, both revenue and operating expenditures showed a positive outcome. Revenues received were $2.05 million more than the amended budget and expenditures were $443,000 less than the amended budget. The General Fund’s ending fund balance at June 30, 2019 is projected to total approximately $51.3 million, a decrease of seven percent from FY 2017-18. This preliminary fund balance is still significantly higher than originally projected for FY 2018- 19. A history of the General Fund’s fund balance history is presented in Attachment 2. In conclusion, the projected FY 2018-19 budget vs. actual amounts are more favorable than projected and fund balance is anticipated to close higher than expected. The City received one-time revenues which resulted in at least $2 million more revenue than budgeted. This is a more favorable outcome than the Finance Department originally expected. We remain cautious as we begin reviewing the FY 2019-20 financial information and will continue to stay apprised of recurring and one-time revenue to refine our projections next fiscal year and this fiscal year’s final performance. FY 2019-20 GENERAL FUND PACING For the quarter ended September 30, 2019, the General Fund received $14 million, or 10 percent of revenue budget, and incurred $45 million, or 31 percent, of budgeted expenditures (Attachment 3). It is important to note that the City does not receive its revenues or pay its bills evenly throughout the year. Staff has outlined major revenues with timing differences and reasons.  Sales tax revenue is less than 10 percent of budget. There is always a two-to-three month gap between a retailer remitting sales tax to the State disbursing this tax to a local agency. As of September 30, 2019, the City only received one month of FY 2019-20 sales tax, which is standard.  TOT is pacing close to target at 18 percent. This represents two months of revenue collections. Given that TOT revenue was below budget in FY 2018-19, staff will pay close attention to monitor its pacing going forward.  Marijuana gross receipts tax is pacing at 8 percent. This represents two months of revenue collections. Three more businesses are expected to come on board by December 31. The City is also reviewing the effectiveness of the tax rate from the local marijuana businesses.  Other revenues are pacing at 69 percent. The loan repayment from the Successor Agency is paid to the General Fund in July of every year. This year’s amount was $1.06 million.  Transfers In shows 100 percent of budget received. This represents a one-time transfer from the Capital Improvement Projects Fund of $1.15 million, returning project savings to the General Fund to help pay for operating costs for the year. 5 On the expenditures side, the expectation is that the City has spent 25 percent of the budget; however this is an inaccurate assumption because the City prepaid its CalPERS pension unfunded accrued liability (UAL) payment in full in July 2019. The entire $20 million prepayment has been charged to the departments in the first quarter. However, some departments are pacing lower than 25 percent, primarily due to vacancies and contracts that are only paid once per year. Those payments will happen in future quarters. Staff will continue to analyze monthly financial results as we move into the second quarter and will assist the departments in addressing issues early so we can ensure the City comes within budget by the end of the year. It is still too early to project how much revenues the City will receive for the year. There are indications that some revenue budgets, such as sales tax, TOT, marijuana gross receipts tax might need adjustments (Attachment 4). Staff will bring back recommendations during the mid-year budget review once we have more information. STATUS OF ITEMS DEFERRED FROM FY 2019-20 ADOPTED BUDGET: The FY 2019-20 preliminary budget contained several proposed positions that were ultimately deferred during the June 18th budget adoption hearing. Staff requested at that time to allow these positions to be re-evaluated in conjunction with the review of FY 2018- 19 year-end balances and FY 2019-20 first quarter financial results. A list of these positions are in Attachment 5. Subsequently, the Finance Department requested to substitute the full-time Financial Analyst position to a full-time Budget and Purchasing Manager position based on a higher priority need in the department. The City Council approved this request on November 5, 2019. Finance staff also had numerous discussions with IT and Development Services regarding their deferred positions, which remain critical since they respond to three of the City Council’s goals. Code Enforcement Officers keep our community safe (City Council Goals No. 1) by addressing code violations. IT department staff is responsible for keeping every department’s system running smoothly, including Finance and payroll. They play a significant role in keeping the City fiscally sustainable, to address our long-term obligations as well as immediate needs (City Council Goals No. 3), and good government and community engagement (City Council Goals No. 6). Having full-time status in both departments will help with staff retention. Given the better than expected FY 2018-19 preliminary financial results and FY 2019-20 pacing, staff is again recommending the conversion of two part-time positions to one full- time Network Administrator and three part-time Code Enforcement Officers to two full- time Code Enforcement Officers. Attachment 5 provides the estimated costs for these recommendations. During the FY 2018-19 budget adoption, the Police Department also made numerous requests. The initial list totaled nearly $4 million. Staff has been working closely with the Police Department to research outside funding opportunities, including grant funding and equipment financing to help fund these requests. 6 Finance and the Police Department have developed a 3-year implementation plan to fund the Police Department’s most critical requests (Attachment 6). A phased approach will allow the City to address how to pay for these items, as well as set a realistic goal for implementation. The first item we addressed was the highest priority item, the Mobile Command Vehicle (MCV). The MCV was previously approved and appropriated by City Council in FY 2017- 18 however, when the item was ready to be purchased, the Finance Department identified a structural deficit in the Equipment Replacement Fund necessitating the identification of an alternative financing source. Since then, the Finance Department has been looking at all funding options including grants, leases, loan financing and cash reserves. At today’s low interest rate environment, the City can borrow from a financial institution to fund a significant purchase at a favorable interest rate. At this time, staff is reviewing a financing option for the mobile command vehicle (MCV), which is estimated to cost $1.5 million if we purchase it today. Under the financing option, the annual cost is expected to be $180,000 each year over a 10-year period. The Police Department has evaluated this option and is in agreement with the Finance Department’s recommendation. If financed, this would allow the City to consider using cash for other critical needs such as the L3 police car video system and five replacement vehicles, which will be prioritized in FY 2019-20 (Phase 1). As shown in Attachment 6, the Finance Department and Police Department are recommending the City Council consider financing the MCV as described above. Payments will not begin until FY 2020-21. In addition, the Finance Department recommends appropriating $1.125 million (the amount needed to purchase the L3 police car video system and five replacement vehicles, plus a ten percent contingency) from the FY 2018-19 one-time sales tax revenues received that were unanticipated. In Phase 2, the Finance Department and Police Department recommend budgeting five additional vehicles and the Police vehicle computers (MDCs). Phase 2 also includes the proposed first year financing payment for the MCV estimated to total $180,000. If approved, $1,185,000 would be included in the FY 2020-21 Budget. In Phase 3, the Finance Department and Police Department recommend budgeting five more vehicles. Phase 2 also includes the proposed second year financing payment for the MCV estimated to total $180,000. If approved, $410,000 would be included in the FY 2021-22 Budget. Finally, the three remaining items have already been purchased (including the CCTV System, Drone, and Dragon Dictation Software). Other items are anticipated to be purchased through outside funding sources such as AB 109, Assert Forfeiture Funds, or other grant opportunities (including the personal protective equipment, Digital Imaging Management Software and Crime Scene Investigation Equipment). ALTERNATIVES CONSIDERED: No alternatives were considered for this study session. 7 FISCAL REVIEW: This report is for update purpose only. Any recommendations contained herein will be brought back to the City Council in the near future, including the fiscal impact associated with those recommendations. LEGAL REVIEW: The City Attorney has reviewed and approved this report as to form. COUNCIL GOALS AND PRIORITIES: The reporting of FY 2018-19 General Fund preliminary financial results, 2019-20 pacing and deferred items from 2019-20 budget adoption accomplish the following City Council Goals & Priorities No. 3 – Keep the City Fiscally Sustainable. To address our long-term obligations as well as immediate needs; and No. 6 – Good Government and Community Engagement. CONCLUSION: The projected FY 2018-19 budget vs. actual amounts are more favorable than projected and fund balance is anticipated to close higher than expected. The City received one- time revenues which resulted in at least $2 million more revenue than budgeted. This is a more favorable outcome than the Finance Department originally expected. We remain cautious as we begin reviewing the FY 2019-20 financial information and will continue to stay apprised of recurring and one-time revenue to refine our projections next fiscal year and this fiscal year’s final performance. In addition, the Finance Department has evaluated the deferred items from the FY 2019- 20 budget adoption and in collaboration with the IT Department, Development Services Department and Police Department, has developed recommendations for achieving each department’s needs. KELLY A. TELFORD, CPA BRYAN GLASS Finance Director Police Captain KIMBERLY HALL BARLOW City Attorney 8 ATTACHMENTS: 1. FY 2018-19 Financial Results (Preliminary) 2. General Fund-Fund Balance History 3. FY 2019-20 Q1 Financial Results 4. FY 2019-20 Possible Budget Adjustments 5. Deferred Items – Staffing 6. Deferred Items – Police Department Requests DISTRIBUTION: City Manager City Attorney City Clerk Staff CITY OF COSTA MESA GENERAL FUND BUDGET VS. ACTUALS (Preliminary Unaudited) FISCAL YEAR 2018-19 FY 18/19 Amended Budget FY 18/19 Preliminary Actuals FY 18/19 Positive/ (Negative) Variance Beginning Fund Balance, July 1 55,224,080$ 55,224,080$ -$ Revenues Taxes Sales and Use Tax 61,969,937$ 64,902,009$ 2,932,072$ Property Tax 42,958,877 42,873,901 (84,976) Transient Occupancy Tax 9,571,342 8,595,417 (975,925) Franchise Tax 5,054,219 5,042,551 (11,668) Business Tax 942,541 929,351 (13,190) Marijuana Gross Receipts Tax 1,560,000 163,803 (1,396,197) Licenses and Permits Marijuana Business Permits - 163,720 163,720 Other Licenses and Permits 3,445,541 3,220,638 (224,903) Fines and Forfeitures 1,554,770 1,851,890 297,120 Use of Money and Property 4,238,163 4,430,995 192,832 Other Government Agencies 667,411 785,617 118,206 Fees and Charges for Services Marijuana CUP - 302,588 302,588 Paramedic Transportation 3,000,000 3,048,986 48,986 Fees and Charges for Services 4,827,926 5,525,160 697,234 Other Revenues 1,958,177 1,965,854 7,677 Transfers In 40,000 41,287 1,287 Total Revenues 141,788,904 143,843,767 2,054,863 Expenditures City Council 753,029$ 667,505$ 85,524$ City Manager 10,043,686 9,738,974 304,711 City Attorney 1,170,015 1,170,015 0 Finance 3,389,724 3,310,638 79,086 Parks and Community Services 7,339,959 6,611,825 728,134 Information Technology 3,743,745 3,226,849 516,896 Police 48,110,609 46,271,525 1,839,084 Fire 27,852,726 28,809,137 (956,411) Development Services 7,272,976 6,250,876 1,022,100 Public Services 19,435,120 18,561,083 874,036 Non-Departmental (1,013,075) 3,037,092 (4,050,167) Total Operating Expenses 128,098,514 127,655,519 442,995 Transfers - Non-Capital 271,927 271,927 - Transfers - Capital Improvement Project (CAN) 8,576,902 8,576,902 - Transfers - IT Replacement Fund (LMS & ERP) 1,731,074 1,731,074 - Transfers - 115 Trust Fund 1,750,000 1,750,000 - Transfers - Self-Insurance Fund 3,290,812 3,290,812 - Total Transfers 15,620,715 15,620,715 - Total Expenditures 143,719,229 143,276,234 442,995 Operating Surplus/(Deficit) Before Shelter (1,930,325) 567,533 2,497,858 Transfers - Homeless Shelter Operating Costs 1,003,400 1,003,400 - Transfers - Capital Improvement Project (Shelter Acquisition) 3,425,000 3,425,000 - Total Transfers for Homeless Shelter 4,428,400 4,428,400 - Operating Surplus/(Deficit) After Shelter (6,358,725) (3,860,867) 2,497,858 Ending Fund Balance, June 30 48,865,355$ 51,363,213$ 2,497,858$ Attachment 1 TOTAL FUND BALANCE % Increase/ (Decrease) Declared Disasters (A) Self-Insurance(B) Economic(C) Compensated Absences(D) Police Retirement 1% Supp(D) OPEB(D) Non-Spendable(E) June 30, 2019 Est51,363,213$ -7% 14,125,000$ 2,000,000$ 7,500,000$ 4,892,819$ 2,297,253$ -$ 280,194$ 20,267,947$ June 30, 2018 55,224,080 -12% 14,125,000 2,000,000 6,000,000 4,354,527 2,376,305 - 2,038,518 24,329,730 June 30, 2017 63,065,129 -2% 14,125,000 2,000,000 4,500,000 4,010,752 2,527,726 4,280,610 2,253,843 29,367,198 June 30, 2016 64,472,461 20% 14,125,000 2,000,000 3,000,000 4,107,428 2,766,672 3,946,563 2,486,085 32,040,713 June 30, 2015 53,815,951 7% 14,125,000 2,000,000 1,500,000 4,036,221 2,166,823 3,622,775 4,165,795 22,199,337 June 30, 2014 50,200,326 10% 14,125,000 2,000,000 - 4,443,799 2,262,032 3,310,261 3,430,104 20,629,130 June 30, 2013 45,646,441 -5% 14,125,000 2,000,000 - 4,871,727 2,362,297 2,897,591 3,137,794 16,252,032 June 30, 2012 47,809,926 6% 14,125,000 2,000,000 - 5,435,878 2,440,991 2,470,935 12,872,213 8,464,909 June 30, 2011 45,275,530 9% 14,125,000 2,000,000 - 5,438,852 2,534,919 1,926,696 13,334,328 5,915,735 June 30, 2010 41,520,065 -15% 14,125,000 2,895,045 - 4,724,270 2,624,382 1,407,942 14,421,676 1,321,750 June 30, 2009 48,856,719 -26% 14,125,000 3,346,808 - 6,875,301 2,713,058 664,000 15,140,564 5,991,988 June 30, 2008 66,236,447 -10% 14,125,000 3,006,249 - 6,732,116 - 6,000,000 15,768,661 20,604,421 June 30, 2007 73,384,067 3% 14,125,000 10,579,069 - 6,249,240 - 7,000,000 16,326,310 19,104,448 June 30, 2006 70,937,168 2% 14,125,000 11,007,121 - 6,023,443 - 6,500,000 12,744,220 20,537,384 June 30, 2005 69,832,354 13% 14,125,000 11,900,385 - 5,349,013 - - 13,227,236 25,230,720 June 30, 2004 61,600,230 3% 14,125,000 11,900,385 - 5,349,013 - - 13,225,005 17,000,827 June 30, 2003 59,819,921 N/A 14,125,000 9,539,622 - - - - 13,579,931 22,575,368 CommittedAssigned Unassigned (F) CITY OF COSTA MESAGENERAL FUND - FUND BALANCE HISTORYAttachment 2 Fiscal Year 2019-20 Projected Ending Balances as of September 30, 2019 FY 19/20 Amended Budget Possible Future Adjustments FY 19/20 Estimated Actuals Revenues Taxes Sales and Use Tax 59,854,856$ 1,000,000$ 60,854,856$ Property Tax 43,246,886 - 43,246,886 Transient Occupancy Tax 9,619,199 (600,000) 9,019,199 Franchise Tax 5,166,745 - 5,166,745 Business Tax 955,000 - 955,000 Marijuana Gross Receipts Tax 1,143,000 (500,000) 643,000 Licenses and Permits Marijuana Business Permits 64,575 64,575 129,150 Other Licenses and Permits 3,402,145 - 3,402,145 Fines and Forfeitures 1,623,244 - 1,623,244 Use of Money and Property 4,283,988 - 4,283,988 Other Government Agencies 438,600 - 438,600 Fees and Charges for Services Marijuana CUP 81,000 - 81,000 Paramedic Transportation 3,400,000 - 3,400,000 Fees and Charges for Services 5,351,601 120,000 5,471,601 Other Revenues 1,920,064 - 1,920,064 Transfers In 1,150,000 - 1,150,000 Total Revenues 141,700,903$ 84,575$ 141,785,478$ Expenditures City Council 768,216 768,216 City Manager 9,693,957 9,693,957 City Attorney 1,000,000 1,000,000 Finance 4,309,638 4,309,638 Parks and Community Services 7,340,458 7,340,458 Information Technology 3,665,497 3,665,497 Police 49,618,066 49,618,066 Fire 28,245,213 28,245,213 Development Services 7,195,106 7,195,106 Public Services 19,209,987 19,209,987 Non-Departmental 5,599,420 5,599,420 Total Operating Expenses 136,645,558 - 136,645,558 Transfers - Non-Capital - - Transfers - Capital Improvement Project (CAN) 4,264,971 4,264,971 Transfers - Capital Improvement Project (Shelter Renovatio 1,400,000 1,400,000 Total Transfers 5,664,971 - 5,664,971 Total Expenditures 142,310,529 - 142,310,529 Operating Surplus/(Deficit)(609,626) 84,575 (525,051) Ending Fund Balance, June 30, 2019 52,599,601 84,575 52,684,176 Attachment 4 Items Deferred During FY 19/20 Budget Adoption - AddendumStaffing ItemsOriginal RequestDepartment Description Original Estimated Cost Ongoing Estimated Costs Finance Department FT Financial Analyst (new position) 139,014 139,014 Information Technology DepartmentFT Network Administrator - Eliminate PT Intern and PT Programmer Analyst and add this positon8,570 36,686 Development Services DepartmentFT Code Enforcement Officers (2) - Eliminate one PT Code Enforcement Officer and reclassifying two PT Code Enforcement Officers to full time12,987 12,987 Estimated Cost to General Fund160,571 188,687 Revised RecommendationsDepartment Description Original FY 19/20 Estimated Cost Revised FY 19/20 Estimated Cost* Ongoing Estimated Costs 139,014 - 139,014 - 106,093 212,186 Information Technology DepartmentFT Network Administrator - Eliminate PT Intern and PT Programmer Analyst and add this positon8,570 5,713 36,686 Development Services DepartmentFT Code Enforcement Officers (2) - Eliminate one PT Code Enforcement Officer and reclassifying two PT Code Enforcement Officers to full time12,987 8,658 12,987 Estimated Cost to General Fund160,571 120,464 261,859 * Based on 8 months left in the fiscal year.Finance DepartmentFT Financial AnalystFT Budget and Purchasing ManagerAttachment 5